Question

Answer the following questions for each of the following examples: (i) keeping your front yard in great shape; (ii) pollutants dumped in the air and water by petroleum refineries in CC; (iii) a professor working on Alzheimer research; and (iv) getting vaccinated for flu

In each of the four cases, carefully graph the given scenario and show private solutions and socially optimal solution. Determine whether there is overproduction or underproduction. In graphs, label as many things as humanly possible.

Answer 1

(i). A clean front yard is not only a joy to the owners but is a beautiful scene that can be enjoyed by all passers by—its benefits are available to the society at large . The following diagram represents the scenario:

In the diagram, MPB shows the private benefits gained by the residents of the house as a result of keeping the front yard clean!!, while MSB shows the benefits that the society ( passers by , neighbours and so on…) who gain from enjoying the beauty of the front yard. Hence, the social benefit received would be Q₁ while the private benefit would be Q. MC being the marginal cost curve showing the costs incurred in keeping the yard clean.

(ii) Pollutants dumped are a negative externality where the society bears more costs than the producers. The social costs are greater than the private costs. This is shown in the following diagram:

In the diagram, MSC is the marginal social cost curve which is higher than the MPC or the marginal private costs ( costs borne by the producers). The triangle abc ( shaded region) represents the costs the society bears because of pollutants being dumped in air and water by petroleum refineries. The firms will produce till Q₁ , which would mean that the society is bearing the costs of the production more than that borne by the firms. In such cases governmental regulations are needed.

(iii) A professor working on Alzheimer research will benefit not only himself but the society at large. The positive benefits are much more than the private benefits.

The above diagram shows MSB the marginal social benefits that the society receives as a result of the Professor’s research, it far exceeds the MPB curve which is the benefit accruing to the professor. MC is the marginal cost curve showing the costs of the research. The area abc shows the benefits that the society would receive as a result of the research.

(iv) Getting vaccinated for flu is a positive externality that benefits not only the person who got vaccinated but others around since he would not be a transmitter of the virus after taking the vaccine. This is shown by the MSB curve in the diagram below, which is greater than the MPB curve. The society would be better off from consuming (getting vaccinated ) upto Q₁ . However if people chose not to get vaccinated then the society would prefer Q amount since individuals will benefit only if the benefit is at least equal to the cost but not greater.